Reforms to the international tax system for curbing avoidance by multinational enterprises

05/10/2015 - The OECD presented today the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru. The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.

“Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust,” said OECD Secretary-General Angel Gurría. “BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective,” Mr Gurría said.

Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.

The OECD will present the BEPS measures to G20 Finance Ministers during the meeting hosted by Turkey’s Deputy Prime Minister Cevdet Yilmaz on 8 October, in Lima, Peru.

Following delivery of the BEPS measures to G20 Leaders during their annual summit on 15-16 November in Antalya, Turkey, the focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing.

The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.

The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.

The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.

“Everyone has a stake in reversing base erosion and profit shifting,” Mr Gurria said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”

For further information on the OECD/G20 Base Erosion and Profit Shifting Project, including the 2015 Explanatory Statement, the 2015 BEPS Reports, background information and FAQs, go to: www.oecd.org/tax/beps-2015-final-reports.htm